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Edited Transcript of SBRA earnings conference call or presentation 8-Aug-19 5:00pm GMT

Q2 2019 Sabra Health Care REIT Inc Earnings Call

IRVINE Aug 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Sabra Health Care REIT Inc earnings conference call or presentation Thursday, August 8, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Harold W. Andrews

Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary

* Michael Costa

Sabra Health Care REIT, Inc. - EVP of Finance

* Richard K. Matros

Sabra Health Care REIT, Inc. - Chairman, President & CEO

* Talya Nevo-Hacohen

Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer

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Conference Call Participants

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* Chad Christopher Vanacore

Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst

* Lukas Michael Hartwich

Green Street Advisors, LLC, Research Division - Senior Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Richard Charles Anderson

SMBC Nikko Securities America, Inc., Research Division - Research Analyst

* Todd Jakobsen Stender

Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

* Trent Nathan Trujillo

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT Second Quarter 2019 Earnings Conference Call. This call is being recorded.

I would now like to turn the call over to Michael Costa, EVP Finance. Please go ahead, Mr. Costa.

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Michael Costa, Sabra Health Care REIT, Inc. - EVP of Finance [2]

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Thank you. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our acquisition, disposition and investment plans, our expectations regarding our financing plans and our expectations regarding our future financial position and results of operations. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2018, and in our Form 10-Q for the quarter ended March 31, 2019 and June 30, 2019 as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid.

In addition, references will be made during the call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included in the Financials page of the Investors section of our website at www.sabrahealth.com. Our Form 10-Q, earnings release and supplement can also be accessed in the Investors section of our website.

And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [3]

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Thanks, Mike. I appreciate it. And thanks everybody for joining us today. We had a productive first quarter particularly in the context of creating long-term value for our shareholders through the execution of a number of things that improve our balance sheet, including our first high-grade issuance. We also have -- we're fully committed on a new credit facility which will lower our cost of debt as well. We've made significant progress on delevering our balance sheet, and we've kicked off the process to pursue getting that new joint venture partner for Enlivant joint venture. We hope to conclude that process by year-end. That will mitigate the need for any material equity raise on our part. I know everybody has been expecting us to pull that 100% of the JV, which will require significant check. So that won't be the case. And as Harold will tell you when we get to their sections, we'll provide more detail on all the aforementioned items. We are reaffirming guidance. Our acquisition pipeline currently stands at about $500 million, primarily senior housings that we are starting to see some skilled deals now. We had mentioned, I think, on the last call and certainly the last couple of conferences that we've been exploring opportunities to enter the addiction chemical dependency states. Similar to the behavioral states, we really like it a lot. It has got tailwinds. It's got strong reimbursement. And from a policy perspective, it's viewed as important and getting a lot of support. So we've been pursuing potential opportunities there. So we're -- we'll be closing on our small deal there. It's not that material, but it allows us to get into the space and start developing a reputation as a capital partner there. We're working on some other deals as well.

In addition to that, with our operating tenants, we're looking at repurposing a handful of facilities that can be converted to things like the addiction, behavioral services and the like. And we've got a couple of operators that had been very active in that regard. So we look forward to doing more of that as well. It's -- there aren't very many other uses for skilled nursing facilities, some others for senior housing, but there's some limitation there as well. And this is a perfect avenue to pursue in those markets that lend itself to having those kinds of services rather than the existing services that currently exist.

We expect to see from our proprietary development pipeline about $70 million coming in this year from options that we're going to exercise. Those properties will be in at about 7.5% cap rate. Then again, a 7.5% cap rate on brand-new senior housing product is quite a bit better than we could get buying 25-year-old older assets at this point. So -- and we have about $130 million left in that pipeline that will be coming in there for this -- after the end of this year as well. So we still have a little bit ways to go on that.

In terms of operations, our triple-net Senior Housing same-store EBITDA was flat sequentially at 1.33. Our same-store Senior Housing occupancy was up 120 basis points to 86.1%. Our skilled portfolio was stable with EBITDA and sequential coverage at 1.76 versus 1.77. Our Occupancy and Skilled Mix were down 20 basis points and 30 basis points to 83% and 39% -- 39.4% on Skilled Mix, respectively. We have no tenants remaining that require restructuring and no additional disposition plans beyond what we've already announced.

I do want to comment on a couple of our top 10 tenants that have some reduction in coverage. Avamere and Healthmark and McGuire all came down, but that was primarily due to an exceptionally strong first quarter of 2018 that fell off the trailing 12, so it just wasn't a good comp. Their current performance is steady. We see no erosion with those operators and expect no changes there. Avamere is going to benefit from a significant rate increase in July from the state of Oregon and also a really; nice benefit from a new pharma contract that's materially improved their NOI. And Washington State, which has really been the problem of that portfolio, is now saying that they are going to have a material Medicaid rate increase potentially in the first quarter of next year. But it's Washington State, so we'll believe it when we see it. But there does appear to be some positive momentum there.

The other tenant that I want to mention is North American, which drifted slightly down from 1.09x to 1.07x. But on a current trailing 3 basis ending May of 2019, they were up over 1.2x and continue to show improvement. So that's trending the way we anticipated it would trend. So again, that really covers -- the tenant's had probably caught everybody's attention. And again, no need from our perspective to contemplate doing anything different with rents or selling of assets. And finally, CMS confirmed the 2.4 market basket for October 1 this year, and in conjunction with that, we'll see the implementation finally of PDPM.

We recently had our Operators Conference last month. We had 35 to 40 operators there across all asset classes, spent a lot of time sharing best practices, talking about not just PDPM but other opportunities that are coming into play from a reimbursement perspective both for Skilled Nursing and for Senior Housing. And it was very productive, and every one of our operators are reporting really good progress in terms of preparing for PDPM. We don't expect any sort of downturn from the transition going through PDPM, although we think it will take a little bit of time to get the full benefits of it, particularly on the revenue side, most people just focus on the cost savings that come along with PDPM. And those are a lot easier to model and calculate, but there will be revenue changes as we see from corresponding behavioral changes with the new reimbursement system. So we feel good about that as well and looking forward to having a good solid base now with a much stronger balance sheet and ready for a good growth as we go into 2020.

And with that, I'll turn the call over to Harold -- Talya rather. And after Talya and Harold are done, we'll go to Q&A. Talya?

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [4]

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Thank you, Rick. I'll provide an update on our managed portfolio. In the second quarter of 2019, approximately 16.4% of Sabra's cash net operating income was generated by our managed Senior Housing portfolio. Approximately 56% of that relates to communities that are managed by Enlivant, and 33% relates our Holiday-managed community. The balance includes our Canadian portfolio and 3 small communities in the U.S. On a same-store year-over-year basis, the managed portfolio which excludes the Holiday asset had solid results in the second quarter compared with the second quarter of 2018.

Revenues increased by 3.1%. Cash net operating income increased by 3.6%, and revenue per occupied unit excluding the nonstabilized assets was up 4.7%. I'll remind you that last quarter, the story was very similar when we reported same-store results with a 3.9% increase in revenue, 2.4% increase in cash net operating income and a 4.6% increase in revenue per occupied unit. Our operators are successfully balancing occupancy versus rate and improving profitability in spite of the industry headwinds that we all hear about.

Now for some details. The Enlivant joint venture portfolio with 170 properties as 2 communities were sold in the second quarter, of which Sabra owns 49%, showed steady improvement. Average occupancy for the quarter was 81.8%, which is 0.9% higher on a same-store year-over-year basis.

Revenue per occupied unit was $4,272, 5.2% higher on a same-store year-over-year basis. This is the highest REVPOR achieved during our hold period. Importantly, cash NOI margin was 24.9%, up from 24% on a same-store year-over-year basis. For the first half of 2019, the Enlivant joint venture's cash net operating income was 6% higher than in the first half of 2018.

Sabra's initial minority investment in the Enlivant joint venture was always viewed as the first step towards making a long-term investment in the portfolio. With this in mind, Sabra negotiated an option to buy out TPG, its partner in the joint venture, exercisable through January 2021. This allows us to own or control the joint venture long term while providing liquidity for our partner by either buying out TPG or taking a controlling interest in the JV by bringing in a minority partner. We have now started the process to identify an investor, preferably with a long-term investment horizon and an appreciation of the strength of the Enlivant platform, who would be interested in coinvesting with Sabra in the joint venture. This would allow Sabra to take a controlling interest in the joint venture with minimal additional capital and retain optionality for Sabra to own 100% of the portfolio at some point in the future. Both TPG and Enlivant are supportive and actively involved as partners in our process.

Now to the results of the wholly owned managed portfolio. Sabra's wholly owned Enlivant portfolio of 11 communities gave back some of the outsized gains that were made in 2018. Occupancy was nearly flat to the prior quarter at 90.7% but declined on a year-over-year basis by 3.4%, reflective of lower move in volumes. Revenue per occupied unit rose to $5,431, a 1.3% increase over the prior quarter and 6.7% over the prior year. Cash NOI was down 5.6% on a year-over-year basis, driven by certain onetime expenses such as insurance claims. But for the first half of 2019, the cash net operating income was 4.6% higher than in the first half of 2018.

We transitioned our Holiday portfolio from our net lease to managed portfolio at the start of the second quarter, so this is the first time that we are reporting community-level statistics. Portfolio occupancy was 89.1% in the quarter, slightly higher than 89% flat in the prior quarter, nearly 1 point higher than in the second quarter of 2018. REVPOR was $2,459, which is even year-over-year. The Holiday team has maintained its focus on operations despite the distraction of negotiating with each of its landlords over the past year. Since the transition has -- was completed, we have worked with Holiday to explore acquisitions of independent living communities catering to the middle market, a product type where we believe a company excels.

Sienna Senior Living manages 8 retirement homes for us in Ontario and British Columbia. In the second quarter of 2019, the 8 properties managed by Sienna showed steady operating and financial results with 89.6% occupancy, slightly down relative to the prior quarter. REVPOR was $2,191, which was even with the prior quarter and 3.2% higher on a year-over-year basis, and cash net operating income was up 4.2% on a year-over-year basis and flat sequentially. We continue to reinvest in our Canadian portfolio and work with our partners closely to ensure that the communities are competitive and profitable in their markets.

And with that, I will now turn over the call to Harold Andrews, Sabra's Chief Financial Officer.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [5]

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Thank you, Talya. This quarter was marked by significant progress towards improving our balance sheet, including our stated goal of lowering leverage to below 5.5x by year-end. Our efforts resulted in an improved cost of debt and significant improvements in other key credit metrics.

First, we completed the issuance of $300 million of 4.8% senior notes due 2024, our first issuance since the completion of our merger with Care Capital properties, allowing us to take advantage of the investment-grade bond rating that merger provided. The net proceeds from the offering together with borrowings on our revolver were used to redeem all $500 million of our outstanding 5.5% senior notes that were due 2021, including both our debt maturities, schedule and our cost of debt.

We also sold 11.1 million shares of common stock under our ATM Program during the quarter, generating net proceeds of $214 million. These proceeds together with the proceeds from real estate sales were used to reduce total consolidated debt by $545 million from $3.2 billion as of March 31, 2019, to $2.7 billion as of June 30, 2019. These transactions combine to lower our cost of permanent debt by 19 basis points to 4.09% as of June 30, 2019, and to reduce our net debt-to-adjusted-EBITDA ratio, including our unconsolidated joint venture, from 6.08x as of March 31, 2019, to 5.76x as of June 30, 2019. This 32 basis point reduction is -- in leverage takes us more than halfway to our year-end goal of leverage below 5.5x.

In addition, these activities improved our credit metrics compared to the first quarter of 2019. Our interest coverage improved 4.43x, increasing to 4.62x; our fixed charge coverage improved 0.4x, increasing to 4.46x; and our total debt-to-asset value improved 9%, decreasing to 39%.

Finally, we recently kicked off a process of amending and extending our $2.2 billion credit facility and as of today have received commitments from our key lending relationships for the full amount of the amended facility. Closing on this amendment is expected to occur in the upcoming few weeks, and we expect strong participation from our important banking relationships. This amendment will improve our interest rate spread on the term loans and revolver by 20 and 15 basis points, respectively, based on our current credit rating, saving over $2.8 million of annual interest expense using our current revolver balance. Furthermore, it will improve our debt maturities laddering by extending the maturity of the revolver by 2 years to August 2023 and create an additional laddering of our term loans with various maturities through August 2024. Along with this amendment, we took advantage of the recent interest rate environment and extended our interest rate protection for the vast majority of our variable rate term loan borrowings to their new maturity dates using a mix of forward interest rate swaps and collars. These steps have put us in an excellent position going forward to fund future growth opportunities while eliminating a significant amount of interest rate and refinancing risks.

And now a few comments about the financial performance for the quarter. For the 3 months ended June 30, 2019, we recorded revenues and NOI of $219.4 million and $198.2 million, respectively, compared to $136.8 million and $129.3 million for the first quarter of 2019. These increases are primarily due to $66.9 million of lease termination income recognized in the current quarter related to the transition of the Holiday communities to our Senior Housing managed portfolio, of which $57.2 million was a cash payment received and $9.7 million was related to net assets obtained in the transition.

In addition, resident fees and services revenues increased $19 million, and Senior Housing managed portfolio operating expense increased $12.2 million primarily due to the Holiday transition from the triple-net lease structure to our managed portfolio.

Our same-store triple-net Skilled Nursing portfolio cash NOI increased $3.8 million or 5.3% over the first quarter. This increase is primarily due to the adoption of the new lease accounting standard in the first quarter which we discussed last quarter and detailed in our filings. Specifically, under the new standard, we began recognizing revenues for certain leases on a cash basis. In the first quarter, we saw a reduction in earned cash rents of $2.2 million due to timing of collections. This quarter, cash rents paid were higher for those tenants than last quarter, resulting in this same-store NOI increase. There were no changes during the second quarter to the group of tenants accounted for on a cash basis, and we expect some continued variability in cash collections for these cash-basis tenants at least through the rest of 2019 as they are generally operations in some phase of transition. Most notably, the NMS Portfolio transitioned to one of our strongest operating partners.

FFO for the quarter was in line with our expectations at $139.4 million and on a normalized basis was $84.7 million or $0.46 per share. FFO was normalized to exclude the $66.9 million of lease termination income, $10.1 million loss on extinguishment of debt due to the $500 million senior notes extensions and $1.3 million of unreimbursed triple-net operating expenses. AFFO, which excludes from FFO merger and acquisition costs and certain noncash revenues and expenses, was also in line with our expectations at $132.4 million and on a normalized basis was $83.9 million or $0.46 per share. AFFO was normalized to exclude $57.2 million of cash lease termination income, $6.9 million of cash loss on extinguishment of debt and $1.3 million of unreimbursed triple-net operating expenses. This compares to normalized AFFO of $84.3 million or $0.47 per share in the first quarter of 2019.

For the quarter, we recorded net income attributable to common stockholders of $83.7 million or $0.46 per share. G&A costs for the quarter totaled $8.1 million, including $2.8 million of stock-based compensation expense. Recurring cash G&A cost of $5.4 million were 4.1% of NOI for the quarter, excluding the Holiday lease termination income and in line with our prior quarters. We expect quarterly cash G&A cost to average approximately $5.8 million going forward. Our interest expense for the quarter totaled $33.6 million compared to $36.3 million in the first quarter of 2019. Interest expense includes $2.8 million and $2.6 million of noncash interest for the second and first quarters, respectively. Borrowings under the unsecured revolving credit facility bore interest at 3.65% at June 30, 2019, a decrease of 9 basis points from the first quarter of 2019.

We sold 28 Skilled Nursing facilities and 7 Senior Housing Communities during the second quarter of 2019, generating net proceeds of $322.7 million and recognized a $2.8 million net gain on sale. In addition, we sold 2 Senior Housing Communities that were part of our unconsolidated joint venture and recognized a net loss of $1.7 million which is included in the loss from unconsolidated joint venture line item on the income statement.

We were in compliance with all of our debt covenants as of June 30, 2019, and in addition to the metrics I mentioned previously, we saw a secured debt-to-asset value decline from 7% to 2% and unencumbered asset value to unsecured debt increase from 233% to 246% quarter-over-quarter. As of June 30, 2019, we had total liquidity of $772.4 million, consisting of unrestricted cash and cash equivalents of $47.4 million and available funds under our credit facility of $725 million.

As Rick said, we reaffirm our previously issued 2019 guidance, and I would like to highlight a couple of items. Net income and FFO were positively impacted by the $9.7 million noncash lease termination income. As such, we expect for 2019 to be near the high end of our guidance range for these measures. AFFO was positively impacted by the classification of certain costs of disposing and transitioning facilities previously operated by senior care centers as an impairment charge. These costs were classified as cash expenses in the original guidance and have the effect of decreasing AFFO. As such, we expect 2019 AFFO to be the -- near the high end of our guidance range.

Normalized FFO and normalized AFFO ranges remain unchanged. However, we expect normalized FFO to be the -- near the low end of the range due to the reduction of straight-line rental revenues associated with certain leases converted to cash basis under the new accounting standard adopted in 2019 that we discussed in the first quarter and that I mentioned above. Straight-line rents were $2 million for the quarter prior to the accounting change. As such, this change reduces straight-line rental revenue expected for 2019 by approximately $0.04 per share for the year but again does not impact our expected cash rate collections in our guidance and, importantly, does not impact our normalized AFFO guidance. Earnings guidance continues to be based on our expectations of reducing our debt to adjusted EBITDA to below 5.5x by December 31, 2019.

Finally, on August 7, 2019, the company announced that its Board of Directors declared a quarterly cash dividend of $0.45 per share. The dividend will be paid on August 30, 2019, to common stockholders of record on August 20, 2019. In terms of cash flows and related funding of the dividend, we expect full year 2019 cash flows from operations to fully cover our 2019 dividend payments, and notably the cash payment from Holiday represent the available funds generated from the portfolio for dividend payments in the future, totaling $0.31 per share.

And with that, I'll turn it back over to the operator to open up the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Trent Trujillo with Scotiabank.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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So Rick, can I tell you I appreciate that you've spoken about some of your year-over-year comps and the benefits you should see in the back half of the year. But regarding same-store NOI guidance, given negative -- I think it's 2.7% growth on your wholly owned Senior Housing managed portfolio according to supplemental, how comfortable are you with the 3% to 6% range? The results have been better for your unconsolidated portfolio, but in both cases, guidance assumes about 11% growth in the second half of the year. So did the results suggest you're trending toward the low end?

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [3]

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If you look at 2018 numbers, the ability to -- the flu last year has created basically a relatively low bar for our year-over-year comps. So we expect to have an ability to beat 2018 second half in a material way. We also, in our smaller operators that I didn't spend a lot of time talking about, they had some downward trends towards the -- in the second half of 2018 and in -- and that has turned around. And so they are trending positive, which will also have a material impact because we are talking after all about fairly small numbers here.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [4]

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Yes. The only thing I'll add to that is -- and this is -- Trent, this is Harold, the rate increase that we expect on the wholly owned Enlivant portfolio as well. That will have a nice impact in the fourth quarter.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [5]

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Okay.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [6]

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Yes. Current trends, Trent, are better as well. So even forgetting about 2018, certainly in 2019, current trends are better.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [7]

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Okay. Okay. That makes sense. But I just to, I guess, follow up on that maybe a little bit more, I think on the last call, you mentioned, like for the Elivant JV specifically, you had easy comps in the second and third quarter. And there was a lot of discussion about situationally or theoretically if the first quarter NOI was the run rate for the year, then you can hit your guidance. But in the second quarter that NOI, despite being strong at 7.3%, it was not flat quarter-over-quarter so -- and the margin declined. So even with a favorable comp in third quarter, how much more can that accelerate?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [8]

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Well, it did accelerate dramatically in the fourth quarter because we were expecting again up to upwards of 5% rate increases in the fourth quarter, similar to what was in 2018.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [9]

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Right. And the trends are better now anyway, so we expect third quarter to be stronger than the second quarter as it currently was. And it -- as you just noted, over 7% growth, it's been pretty strong. And the question really is how much sort of outsized growth can we have in the managed portfolio to completely offset change in the accounting rule that we have no control over. And so we're not going to mitigate that completely. But again, those current trends and the rate increase that Harold just referred to will get us where we need to be for the year.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [10]

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Okay. Okay. I guess turning to another -- a different topic. How are you viewing dispositions with respect to both portfolio management and the source of capital? At the beginning of the year, you had $600 million in guidance, and that's been to -- reduced to effectively about $400 million. So from a funding perspective, seems like that could be offset from the equity you've been issuing. But how are you looking at your portfolio quality, pruning whatever is noncore? And does that additional $200 million get pushed into 2020? Or is that now being retained?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [11]

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So I'll answer the question about, well, what's being pushed and what's being retained. There's a handful of property sales that were being pushed to next year, and then there's a handful of properties that are not being sold. And particularly -- one particular portfolio that we wanted to hang on to, we were able to negotiate with the buyer who had the right to purchase that portfolio from us this year, hence why we did our disposition expectations. We're going to be able to hang on to that. And as it relates to funding, you're exactly right. I mean it's a bit of -- we're going to see less delevering. If we're hanging on to some of these portfolios as we saw the disposition levels drop, it results in a slightly -- slight increase in leverage, therefore requiring us to raise a little bit more equity. So that's why you see maybe a little higher NOA -- NOI that we're being able to hang on to. If we hang on to these facilities, we have to issue a little more equity to hit our leverage targets. So it kind of all -- they kind of offset each other where you kind of end up in the same place, if you will.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [12]

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And that's all baked into the numbers obviously. In terms of pruning the portfolio more, other than what's been announced, we're pretty much where we want to be. It doesn't mean that there won't be a building here or there that we're going to want to dispose. But for all intents and purposes, we're pretty much done as I mentioned early in the call. We have a few facilities primarily with one operator that they really see some upside to repurposing for different kinds of services other than skilled nursing services like behavioral services. But that -- but they will be depositions, and that should provide upside to those existing assets.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [13]

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Okay. Great. And maybe one more for me. So the guidance for CapEx increased. But I think you kind of messaged that this would be the case since you'd be responsible for following the Holiday transition and other moving pieces. But as you evaluate those properties, how are you thinking about recurring or maintenance CapEx on a run rate basis? Was there much deferred maintenance that might inflate the near-term CapEx spend or -- and then normalize? How should we think about that?

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [14]

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Since the portfolio has been in our hands since 2014 and we did an extensive review at the time of the acquisition, I don't expect that there is really any deferred CapEx. Whether we choose to undertake projects that are more defensive and offensive to maintain and gain market share, that's -- that'll be part of our asset management teams with annual review associated with the budget.

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Operator [15]

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And our next question comes from Nick Joseph with Citi Research.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [16]

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Maybe just sticking to the equity. I think at the beginning of the year, you talked about $0.05 to $0.08 of dilution from equity issuance. Obviously, you've done some of that and maintained your leverage target. But I'm wondering if that's still the amount of equity you're expecting to raise for this year in 2019?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [17]

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Yes, it's Harold. I think the impact on dilution from raising equity is still within that range.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [18]

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Okay. And then maybe just on Enlivant. I'm wondering what -- maybe a little more color there. What percent of ownership would you ideally like to have with the new JV partner? And then how do you think about overall valuation now versus when you initially did the JV?

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [19]

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So in terms of percentage of ownership, we'd like to have a controlling stake, so that would suggest we want to be at 51%. That's not a fixed number, but I think it will be really a function of the discussions we have with investors. Our preferences is to put in a small amount of additional equity and have a controlling interest and replace the balance with another long-term partner. We'll see what the -- what investors say. If there's an interest that -- for example, to come in at 30%, we may or may not be interested in that. We'll have to gauge that.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [20]

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The additional commentary I'd give you is nothing has changed for us in terms of how we view that portfolio and our desire to own 100% of the portfolio at some point in time. But there's no rush for us to do that. And you get in a bit of a box right now because in addition to the equity we're raising through the ATM which we're getting through the end of obviously, but it's a big chapter, right, to take that whole thing down. So it's created a significant overhang on the stock. And if there's an overhang on the stock, it prevents the stock from getting to the point where you can do something that's accretive and pulling the whole thing down, right? So I think pursuing the JV can bring us a long-term partner, give us controlling interest. It should alleviate the overhang we have because we're just not going to have to raise a material amount of equity and then eliminate our downside risk and give the portfolio a little bit more time to mature. So I think all of that is going to be beneficial to our shareholders, and that's why we are pursuing it in that light. And as Talya said, we'll see how the negotiations go relative to the percent, but it's not going to be a big change in all likelihood from where we are now. And it's actually a pretty large universe of potential partners out there, and I think as Talya mentioned in her prepared comments, the fact that TPG has explored a lot of these partnerships in the past and is an active partner with us on helping us to make this happen, we really want to express our appreciation to them as well as the Enlivant team today.

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Operator [21]

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And our next question comes from Chad Vanacore with Stifel, Nicolaus & Company.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [22]

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And I apologize if I missed this, but in your press release, you mentioned $0.04 impact from moving leases to recognize those on a cash basis. Can you give us some more details about what's going on there?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [23]

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Sure, Chad. So going back to last quarter when we transitioned certain leases that under the new accounting rules requires a very, very high level of confidence that you're going to collect a high -- virtually all of the rents over the life of the 15-year lease, it required us to take a look -- it required all the REITs to take a look at those leases and determine which ones are worth hitting that threshold and put them on a cash basis. So we did that in the second quarter, and we did -- we identified properties that had straight-line rents associated with them of about $2 million a quarter. And so what you're seeing in that $0.04 is basically $8 million of annualized straight-line rents that was in our original guidance number that now is out of our guidance number. And that's why we updated our expectations within the range for our FFO number to account for that $0.04 decline that we saw.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [24]

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All right. Harold, how many properties, how many operators are we talking about there?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [25]

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So there's a couple of -- the old NMS Portfolio is one, and then there's a handful of others. It's probably 10 to 12 total operators.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [26]

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Two operators count for about half, and the rest are pretty negligible. And both those 2 operators, by the way, as you recall, the Cadia team has take -- took over the NMS Portfolio. Both those 2 operators are operators that we consider to be really strong operators.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [27]

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Okay. And then I'm -- I was just thinking about -- you were talking about transitioning some properties to behavioral health, and these are Skilled Nursing properties. Maybe what kind of capital improvements are those going to need to do that? And are you going to need to expand your partnership somewhere else?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [28]

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It doesn't really require much capital improvement at all. So the physical plant within a skilled nursing facility can pretty much accommodate, for example, any kinds of behavioral services. And historically for me in my old operator days, I ran behavioral programs under skilled licenses with facilities that if you walk through them, you wouldn't notice any difference other than who the clients are, right? So there's not going to be a material amount of capital there. To the extent that there is some capital that's required then we'll be a partner for those operators, and it typically happens in those things when a REIT kicks in some additional capital, we usually get our a through increased rents. And we don't really -- we don't necessarily anticipate needing to create new partnerships to do that because we have operators that understand that business and can segue into it.

And it's not going to be a huge move in the context of their entire portfolio. But as we said before, we do want to expand our presence in the space, but just the opportunities are few and far between. It's still a very fragmented space. It's still a space that's got a limited number of operators that could have a tried and true history. So it's a little bit tough to find things, but we are working on it. And to the addiction space, I'd make similar comments except to say that it's even younger by a long shot than the behavioral space. So it's taken quite a bit of time on our part to find operating teams that we actually -- we would feel good about [growth] and wrapping our arms around it and making it a material investment in our first foray into the addiction space is a good way for us to go.

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Operator [29]

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And our next question comes from Rich Anderson with SMBC Group.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [30]

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Back to the Enlivant situation. Could this be structured as almost like a fund of funds where you get into a joint venture with an investor and that joint venture makes an investment into the existing joint venture? Is that how it's going to work? Or will it be more of a direct investor into what is already existing with you and TPG and Enlivant?

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [31]

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Okay. So I'm going to explain it the way I think about it, which may be -- maybe that'll clarify it for you. Imagine Sabra replaces TPG as one investor and some new investor comes in and replaces Sabra, so Sabra is the new 51% owner, somebody else -- TPG is the new 49% owner.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [32]

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You really have to take TPG out, so the whole thing happens sort of simultaneously.

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [33]

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Right.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [34]

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Okay. That's great. Okay. Got you. And so from the standpoint of -- does the January 2021 exercisable date sort of go poof once this happens? And so then you have no specific time line to buy out the entirety of it? I guess it would, right, because TPG would be gone?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [35]

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Yes. That -- right. That will go by the wayside, and there'll be a new agreement, however long that agreement is, and there'll be windows within that time period as well. But that all remains to be negotiated.

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [36]

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And -- yes. And in the context of a new investor, yes. But also -- we also have -- if we don't exercise our purchase option by that date, just to make sure I cover the question completely, we still have a right of first offer in case TPG wants to do something. So we're not stuck if we don't get it done by January 2021.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [37]

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Okay. Very, very helpful. Talya, you also mentioned the 16.4% as your SHOP portfolio exposure today including Holiday. A question for anybody. I mean what's the appetite to ramp that up to maybe do some other transitions to RIDEA or to have more -- increasing more of your acquisition activity being structured that way? Is there a magic number? Is it bigger than 16.4%? I'm just curious where you land on that issue.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [38]

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There's not really a magic number. Part of the increase is going to be dependent on how the JV is structured in terms of our ownership. If we had pulled out 100%, I think it's going to pop up from 16.5% to 30%. But that's not going to be the case now. But really, outside of Holiday, Enlivant and Sienna, all the rest of our senior housing operators are minuscule. So any additional growth outside of what happens with the JV on SHOP is going to depend on the acquisition opportunities that we find. And if you want to stay in the senior housing space, then you got to do SHOP deals. You're not going to do tripe-net deals. The only deals that we have seen that are triple-net deals just haven't been attractive to us. For example, there was a facility that we took a look at, and it was almost 40% Medicaid. And that's -- and so that was a great cap rate, but it's only a great cap rate if you love Medicaid waiver. And we don't, and we certainly don't love it at that level. So we chose to pass on bidding on that kind of asset. So if you sort of carve out those kinds of things or turn around, pricing hasn't improved much yet.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [39]

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Okay. Last question. Rick, you said you're not in a big rush on Enlivant. I agree that it's a good stepping-stone to perhaps not write the big check today. But in terms of not being a rush, the joint venture portfolio is obviously significantly underoccupied relative to what the potential there is. What do you think the time frame is to get from 82 to 89-ish with Enlivant? I imagine you'd like to have a lot of that happening on your watch as much as possible.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [40]

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Yes. I think it's going to take several years still for that to happen. There's still some oversupply there. There's absorption that needs to happen. So I think we've got a pretty long window there for that to happen, and we've been talking about -- so it's speculative, obviously, how long it takes Enlivant to get to industry average. By the time it gets to industry average, the industry average should be moving up theoretically, right, because you'll be hitting absorption. And even if development starts ticking up again in '21 or '22, you've got sort of a 3-year window given construction and lease-up and all that kind of stuff. So I think you have a pretty good window where absorption will start paying off and before new development. Even if people don't learn the lessons that they should be learning and they [start with] development again, that probably gets you to like 2025.

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [41]

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The other advantage that you have -- we have with the Enlivant portfolio and Enlivant has with the Enlivant portfolio is that it's a middle-market product. So in today's cost structure for construction and development, it's impossible to build a middle-market product.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [42]

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Yes. And another point I'd make is because most of our properties -- not just senior housing but most of our properties are in secondary markets and out of the top MSAs, we actually aren't seeing some of the same pressures from expense growth and labor growth that you see in the top MSAs. So they may not be A properties, although if you live in that community, it's an A property for that community, right, I think it provides us a little bit more stable environment.

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Operator [43]

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And our next question comes from Lukas Hartwich with Green Street Advisors.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [44]

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Can you talk a bit about the similarities and differences of the addiction treatment business versus Skilled Nursing and Senior Housing?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [45]

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So yes. So it's a good question, and I'll try to just be brief because I can't get really into the weeds on it. But look, first of all, it's completely a service business. A lot more of the focus is on the social aspect and programming than it is on medical care where the social component of programming and care within Senior Housing and Skilled Nursing. Certainly, Senior Housing, now that it's become a medical model and a long-term care model, it's really supplemental to the basic care that needs to be provided to those individuals. And here, there's much stronger emphasis on programming and social things and psychological pieces and all that sort of stuff. Obviously, there's some medication management that's involved with it. But -- and a medication management is never successful without appropriate programming on the social/psychological side of things.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [46]

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Got it. And then I just have a follow-up kind of a housekeeping question. On Page 9 of the supplement, looking at the Enlivant portfolio, REVPOR was up about 5%, and occupancy is up about 1%. But revenues are only up 4%. So I'm trying to figure out -- maybe I'm missing something there, but how do I bridge that gap?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [47]

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Let us get back to you offline on that.

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [48]

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Yes.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [49]

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Sure.

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Operator [50]

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(Operator Instructions) Our next question comes from Todd Stender with Wells Fargo Securities.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [51]

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Just to kind of go back to the ATM issuance in the quarter. Just on a relative basis, it was kind of big for you guys. But how much was that driven by investor demand? How much of that was just you guys maybe wanting to delever quicker, maybe just that push and pull if you can kind of describe how it played out?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [52]

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Sure. I will tell you that there was very strong investor demand. Quite a bit of reverse inquiries coming in, in the desk of those running the ATM program. And when we were able to kind of settle on a price that made sense for us at the market and it made sense, then we were able to do some larger blocks. But it's a mix -- it was a mix of just some of that. And some of that as just being -- taking advantage of days when we felt like the price is holding up well and there was strong demand. So nothing that I would say was out -- really too far outside the norm for any ATM program. We were just appropriately aggressive to raise as much as we did.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [53]

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We could have done a lot more easily, but we -- obviously, we try to manage it.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [54]

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So on a percentage of shares outstanding, there is no restrictions on a quarterly basis, right? It's just if you have availability, you can tap it.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [55]

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That is correct.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [56]

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Right. There's sort of a daily rule of thumb, 10% to 15%, so that it doesn't really impact your stock price. It's not really that noticeable. So that's kind of the daily rule of thumb. And when -- if you go a little above that on a good day or you go a little bit below it, so -- but it's evaluated every single day. So the banks don't like to sort of run the things for a week. Decisions are made on a daily basis.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [57]

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And with black-out periods baked in there, the windows can be quite short, right? So maybe that's why the volume, you take it when you can.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [58]

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That is correct. Yes, you -- during a period of -- the material is nonpublic information, we have to shut it down. So our window typically closes a week or 2 after each quarter end, and then the window will open back up typically after an earnings call. So it is a -- that's somewhere between 7 and 7.5 months out of the year which you can actually be active on an ATM.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [59]

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Okay. And then Rick, you described your investment pipeline, predominantly Senior Housing, but you are looking at skilled. When we see that Omega, for example, has a $735 million portfolio under contract, is that something that's too big? Whether it's literally too big for your size or that's too much SNF at once, how are you kind of evaluating looking at large SNF portfolios, particularly with the yield so high?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [60]

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Yes. And on that portfolio, it's a nice portfolio. We're -- we know that portfolio intimately. We had no interest in it because that is a very big deal for us. And I think, as you know, I've made a commitment that we are not going to do anything that's complicated or require information. We've had a lot of noise in the stock price over the last couple of months, about 1.5 years. And doing a deal of that size, it really puts us on the road to being a skilled REIT. And it becomes harder and harder to come back to that. And again, as I said before -- I mean everybody knows we love the asset class. It's got nothing to do with that. But we think we'll really benefit in the long run from being a more diversified REIT. And prior to the announcement of CCP merger, we saw that reflected in the stock pricing multiples. So we just want to have more of a balance there because then you get even more dependent upon whatever investor sentiment is and however right or wrong that sentiment is. So we just prefer not to make that big a move.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [61]

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Got it. And then just finally, anything you can share -- you hosted the Sabra Operators Conference. I imagine it was post-NAREIT. Anything to share from how the operators are looking at the world, particularly their revenues, labor costs, new supply? And then anything, maybe PDPM is adding some optimism to the SNF folks.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [62]

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Yes. I think generally speaking, a lot of the focus was on all the reimbursement opportunity. There was the focus on labor force as well, and we have some presentations there and some -- the introduction with some pretty cool products. For instance, there's a company out there that has sort of taken the Lyft -- the Uber network model and applied it to staffing. So you go on their app and they've got tens of thousands of people signed up to their app, and you go on the app and you can access temporary employees that way which is the brand-new concept of the space. And because it's basically a virtual network as opposed to a traditional staffing company, even though it may cost you more than having your own staff, it doesn't cost you the same amount as going through a traditional agency which is typically about 35% higher than your in-house cost. So some -- so there was a lot of discussion about things like that and some opportunities that are out there with different companies. But a lot of the focus was on reimbursement on the senior housing side, the new opportunity to partner up with Medicare Advantage on some of the ancillary services in senior housing. We think it's a fantastic opportunity, and that was really embraced and we had some amazing sort of speakers on that.

On the skilled, everybody is focused on PDPM as they should be, but there are other opportunities as well with -- particularly with the I-SNPs, the special needs program, which essentially allows the provider to become its own insurer. And that is just starting to gain momentum. And it's a real game-changer for the industry, particularly when you look at how much the managed -- Medicare Advantage insurer takes it off the table profitability-wise that comes off the back of the skilled nursing facility. This allows them to control that product and control the profitability. We know a private operator that's been fully up and running with that for quite some time and is doing exceptionally well. Our newest Board member, Lynne Katzmann, is involved in that effort as well with a company called AllyAlign because a lot of the operators out there are large enough to take the initial risk to get that going and the time it takes. And so they'll be able to partner with any number of providers to do that. So there's a lot of conversation about that as well, value-based payments.

So it was really, really -- I thought it was the best conference that we've had. We've done a few of these. And as always, our operators get to know each other. They follow up after the conference. They do best practices because we don't have very many operators that would view each other as competitors. So they're pretty open and free with each other about sharing what they all do best. So it's really productive. We had a great turnout, and we'll continue, obviously, to do these things. And we also -- there was also a focus on data and the things that we're trying to do with PointRight to provide constant opportunities at all costs for our operators to take advantage of some predictive modeling that PointRight does on the regulatory side. So those are some of the main areas that we cover.

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Operator [63]

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Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Rick Matros for any closing remarks.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [64]

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Thanks, everybody, for joining us. As always, we're available for as much follow-ups as you all want to do. Thanks again for your support and have a great day. Talk to you soon.

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Operator [65]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.